Cost Behavior Analysis

On this occasion we will provide a summary and discussion of the analysis of cost behavior in the entity’s operations, happy reading, hopefully it will be easier to understand …

Table of contents :

  • Definition of Cost Behavior Analysis
  • Kinds – Kinds of Costs
    • Fixed cost
    • Variable Costs
    • Mixed Costs
  • Activities, Resource Use, and Cost Behavior
    • Flexible Resources
    • Bounded Resources
    • Share this:

Definition of Cost Behavior Analysis

Business activities that are often carried out by a company, both service companies and manufacturing companies are required to be able to carry out a plan,

Calculation and also analysis of the behavior of costs that will be incurred with the aim that the company can increase the efficiency and effectiveness of the company’s performance and also be able to predict the development of the company in the future.

The key to success in the company in maintaining and winning any business competition is how the company is able to be more efficient, economical and also productive in producing output.

The economic principle which states that obtaining a maximum profit by minimizing costs to be incurred is a principle that can be applied in managing a cost without having to ignore the quality of the results of a production.

Therefore, understanding cost behavior is crucial for managers to be able to manage costs to be incurred.

Likewise in making a decision and also estimating costs in the future, the classification of costs according to the cost behavior is a very important key factor.

Related to activity cost behavior, where the activity cost behavior is where the cost changes based on an activity.

 

Also Read:   Accounting According to Experts

 

In business, this activity is expressed quantitatively in terms of volume, time and units of money. Activity is one where the sacrifice of time or resources to obtain benefits is greater than the sacrifice.

Kinds – Kinds of Costs

a. Fixed cost

Fixed cost is a cost which in total remains constant in the relevant range when the level of activity output changes. Fixed cost behavior can change, but the change will not depend on changes in output.

For example, in a metal pipe cutting company the output size of the cutting activity is the amount of heating then the input is a cutting machine and also electricity to be able to operate the cutter.

Mowers rent for $ 60,000 per year and also have the capacity to produce up to 240,000 3-inch pieces a year.

The cost of renting a mower is a fixed cost, as it will still be $ 60,000 per year, no matter how many cuts it has made.

b. Variable Costs

  • Variable costs are costs that vary in total proportionally to a change in output. Hence, the cost of the variable increases when output rises, and will also decrease when output falls.
  • Variable costs can also be expressed by a linear equation. Where the total variable cost also depends on the level of driving this relationship can also be exemplified as follows:

Total variable cost = variable cost per unit times number of units

Our example extends from the cutting company above. Another source that is often used in these cutting companies is electricity. These electricity costs will behave differently from the cost of a mower.

This electricity will be consumed only when output is produced, and also when more output is produced, more electricity is used.

 

Also Read:   Calculation of By-Product Costs

 

Suppose that to cut one 3-inch piece of metal the machine uses 0.1 kilowatt-hour which is $ 2.00 per kilowatt-hour the cost of the activity output level is as follows:

The more 3 inch pieces are produced, the total cost of electricity will also increase proportionately.

In the example of the cutting company, the cost of electricity is exemplified by the following equation:

The total variable cost is $ 0.20 x the number of 3 inch pieces of metal.

c. Mixed Costs

Mixed costs are costs that have a fixed or variable component. The linear equation for mixed costs is:

Total costs = fixed costs + total variable costs

From the above example it can be concluded that: Suppose that the company has three sales agents, each earning a salary of $ 10,000 per year plus a commission of $ 0.50 for each heater they sell.

Activities that have been carried out are heating sales, and also the driver of costs is a unit that has been sold. If 100,000 heaters are sold,

Then the total cost of selling is $ 80,000 — the sum of the fixed salary costs of $ 30,000 (3 x $ 10,000) as well as variable costs of $ 50,000 (0.50 x 100,000).

The equation for the cost of sales for a given firm is: Total costs = $ 30,000 + ($ 0.50 x units sold)

Activities, Resource Use, and Cost Behavior

Short-term costs are often insufficient to describe all the costs that will be required to design, produce, market,

Distributing, as well as supporting a product in the early 1990s, there are also some new insights into the long-run and short-term nature of cost behavior.

This view will relate to the activity as well as the resources that will be required to do so.

Capacity is an actual or potential ability to be able to do something.

So, when talking about the capacity of an activity, what is actually being described is the number of activities that the company can do.

 

Also Read:   Understanding Service Companies

 

Usually, it can also be assumed that the capacity that will be required is related to the rate at which this activity will be carried out efficiently. The efficient level of performance of this activity is often called practical capacity.

a. Flexible Resources

It would be great if a company could buy only the resources that would be needed, precisely when these resources would be needed sometimes it happened.

For example, direct raw materials are often purchased at the time they will be needed and also in an amount that suits the needs of these types of resources are often called flexible resources.

b. Bounded Resources

Bound resources are where the resources to be supplied before their use will be obtained by using an explicit or implicit contract to be able to obtain a certain amount of resources,

Regardless of whether the amount of resources that are available is often fully used or not. These resources that will be tied up can have unused capacity, because more is available than is actually being used.

 

Leave a Comment